Cnooc Said to Cede Control of Nexen’s U.S. Gulf Assets

By Rebecca Penty and Sara Forden -
Mar 1, 2013

Cnooc Ltd. (883), China’s largest offshore
oil and natural gas producer, was barred from controlling Gulf
of Mexico oilfields under U.S. terms for its $15.1 billion
takeover of Nexen Inc. (NXY), people familiar with the matter said.

In its purchase of Calgary-based Nexen, Cnooc acquired
about 200 deep-water leases in the Gulf with reserves equivalent
to about 205 million barrels of oil, one of the largest holdings
in the Gulf, according to Nexen’s website. The state-owned
Chinese oil explorer surrendered operating control of those
assets to quell U.S. national security concerns, said two people
familiar with the agreement who asked not to be named because
the terms aren’t public.

The U.S. requirements for Cnooc contrast with approvals for
state-owned companies including Norway’s Statoil ASA (STL) and
Brazil’s Petroleo Brasileiro SA (PETR4) to control drilling and
production in the Gulf. The U.S. is restricting Chinese
transactions when the investment targets are close to military
installations or have access to certain kinds of technology.
Growing concerns over intellectual property theft and cyber
attacks also have fueled scrutiny of Chinese acquisitions.

“The United States is uncomfortable with the character of
the Chinese government, which it sees as extending to Chinese
state-influenced companies,” Loren Thompson, chief operating
officer of the Lexington Institute, an Arlington, Virginia-based
research group, said in a phone interview yesterday. “The
Chinese are very sensitive about parity in economic relations,”
and may retaliate with stronger protections for Chinese
companies against U.S. competition, Thompson said.

CFIUS Conditions

Nexen said on Feb. 12 it had received approval from the
Committee on Foreign Investment in the United States, known as
CFIUS, for its takeover by Cnooc without specifying conditions,
which it said are confidential.

Cnooc will still own the assets and be allowed some general
oversight, as well as to collect revenue from the properties,
according to the people and an e-mail reviewed by Bloomberg sent
by Nexen to its employees.

The “most significant” term of Cnooc’s agreement with the
U.S. committee was its transition to non-operator from operator,
Peter Addy, the president of Nexen’s U.S. unit, wrote in an e-
mail to employees on Feb. 20, which was seen by Bloomberg.

“In the coming months, we will devote our attention to
identifying and developing procedures to remove Nexen from its
role as an operator,” Addy wrote in the e-mail.

Deciding Power

The word operator is an industry term to describe who has
responsibility for decision-making on a project.

Patti Lewis, a spokeswoman for Cnooc’s Nexen unit in
Calgary, declined to comment on the specifics of the CFIUS
approval. Steven MacKinnon, a spokesman for Cnooc based in
Ottawa, also declined to comment.

Cnooc “remains committed to investing in growth projects
in the U.S. Gulf of Mexico and we’re confident our business
there will be a viable component of our company for the long
term,” Lewis wrote in an e-mail yesterday.

Holly Shulman, a spokeswoman for CFIUS, declined to
comment, saying by law information filed with CFIUS may not be
disclosed to the public.

The U.S. is officially open to Chinese investment, a
position that has been affirmed by President Barack Obama and
senior administration officials. However, national security
issues increasingly “are presenting challenges in transactions
involving Chinese acquirers,” according to a study published by
Covington & Burling LLP in December.

Malicious Hardware

An October House Intelligence Committee report raised
concerns about the counterintelligence and security threat posed
by Chinese telecommunications companies doing business in the
U.S., and urged the government to block transactions by Huawei
Technologies Co. and ZTE Corp. (000063), China’s two largest phone-
equipment makers, citing concerns that the Chinese government
could install malicious hardware or software in U.S.
telecommunications networks.

In September, Obama barred a Chinese-owned company from
building wind farms near a U.S. Navy base in Oregon, the first
time in 22 years a president has blocked a transaction as a
national security risk. CFIUS previously had blocked at least
three transactions that would have resulted in Chinese companies
gaining control of assets near military facilities.

Resolving Threats

“This kind of agreement is a well-established method that
has been used in putting together transactions involving Chinese
entities that ensures there are no location or technology issues
that could threaten national security and allow the investment
to go forward,” said Ivan Schlager, who heads the CFIUS
practice for Skadden, Arps, Slate, Meagher & Flom LLP in
Washington and wasn’t involved in the transaction.

Nexen controlled platforms in the near-shore West Delta
oilfield within 50 miles of the U.S. Naval Air Station Joint
Reserve Base at Belle Chasse, Louisiana, southeast of New
Orleans.

“You do have U.S. national security installations around
the Gulf of Mexico,” said Erica Downs, a fellow at the John L.
Thornton China Center at the Brookings Institution who has
studied the international expansion of Chinese companies. “If I
had to put money on something, that’s probably what CFIUS was
concerned with and that’s consistent with other concerns CFIUS
has had about other Chinese investments.” Downs is a former
energy analyst at CIA.

Expanding Reserves

The purchase of Nexen, which operates in Canada’s oil
sands, the U.K. North Sea and offshore West Africa, will add 20
percent to the Chinese company’s production and 30 percent to
reserves, Cnooc Chief Executive Officer Li Fanrong said on Feb.
27.

The transaction, closed Feb. 25, spurred the Canadian
government to say future acquisitions in the oil sands by state-
owned foreign companies would be rejected barring “exceptional
circumstances.” Cnooc’s previous attempt to gain control of
U.S. oil and gas assets also failed, as the company abandoned
its bid for Unocal Corp. in 2005 after facing political
opposition in Washington.

The U.S. assets in the Nexen deal, including leases for
which Nexen held a stake but did not control output, produced
the equivalent of about 15,600 barrels of oil in 2012, about 8
percent of Nexen’s total output for that year, according to the
company’s annual report.

Sales Possible

The terms are a “slight negative” for Cnooc, because they
probably will force it to seek partners to operate the existing
production Nexen had controlled, as well as any exploration on
its leases, John Stephenson, a vice-president and portfolio
manager who helps oversee C$2.8 billion ($2.73 billion) at First
Asset Investment Management Inc. in Toronto, said in a phone
interview yesterday.

CFIUS is an interagency committee headed by Treasury
Secretary Jacob J. Lew that reviews the national security
implications of transactions that could lead to a non-U.S.
citizen controlling a U.S. business.